sDAI Tutorial: How to generate passive returns with Maker

What is sDAI and how does it work

sDAI (Saving DAI) is a yield-generating stablecoin, offering a simple way to grow your crypto funds. Unlike a traditional stablecoin, sDAI automatically increases in value thanks to MakerDAO's redistributed income. To use it, simply convert your DAI to sDAI via a compatible protocol, such as SummerFi or Spark. The sDAI then works like a crypto savings product: its value grows in your portfolio without any action on your part.

Where does the return come from?

The sDAI return comes from MakerDAO's Dai Savings Rate (DSR), a mechanism specially designed for this product. Here are its funding sources:

• Loan stability fees: MakerDAO charges fees on DAI loans secured with crypto collateral. These fees feed into the DSR yield.
• Loan liquidation income: When the collateral value of a loan falls too low, MakerDAO conducts a liquidation and levies a fee that supports the DSR.
• Tokenised real assets (RWA): MakerDAO incorporates real assets such as tokenised government bonds, generating stable income that helps stabilise the DSR.

In summary, these different sources of MakerDAO income feed into the DSR, allowing sDAI to offer a simple way to generate interest.

Practical example: If you hold 1,000 DAIs and convert them into sDAI with a DSR rate of 5% per annum, you will still have 1,000 sDAI after one year, but their value will be equivalent to USD 1,050. Your funds work for you with no effort on your part.

What can sDAI be used for?

SDAI offers a number of uses suitable for investors, whether you prefer passive or active management. Here are the main uses:

1. Passive return

The simplest solution is to keep your sDAI in your portfolio to generate income. Unlike traditional platforms, you retain full control of your funds. MakerDAO distributes your interest without the need to hold your tokens.

2. Collateral on lending platforms

DeFi platforms like Aave accept sDAI as collateral to borrow other assets. Advantage: your sDAI continues to generate interest even when it is locked. This dual use gradually increases the value of your collateral and naturally reduces your liquidation risk.

3. Participating in liquidity pools

On platforms such as Uniswap or Balancer, you can provide sDAI in liquidity pools. This allows you to collect transaction fees in addition to DSR interest. This strategy multiplies your sources of return, but requires more active management.

Practical example: By depositing 1000 sDAI as collateral on Aave to borrow ETH, you can use this ETH for other strategies while benefiting from the continued growth in value of your sDAI thanks to DSR. This approach optimises the use of your capital.

Advantages and disadvantages of sDAI

Advantages

• Automatic passive return: Once the sDAI has been acquired, no further action is required.
• Stability: sDAI relies on MakerDAO, an established and recognised player for years.
• DeFi compatibility: As an ERC-20 token, sDAI can be used in the Ethereum ecosystem, subject to sufficient liquidity and bridges between blockchains.
• Availability: You can transfer or exchange your sDAI at any time without losing your earnings, with no lock-in period or penalty.

Disadvantages

• Variable return: The DSR rate, set by MakerDAO's governance, may vary according to market conditions.
• Competition: The emergence of new products such as sUSDS, aDAI, aUSDC could reduce the attractiveness of sDAI. The sUSDS, in particular, is an evolution of the sDAI introduced when MakerDAO was rebranded in Sky, promising higher yields thanks to an improved DSR.
• Dependence on the DAI peg: The stability of sDAI depends on maintaining parity between the DAI and the dollar.

What are the risks associated with sDAI?

1. Variability of returns

MakerDAO's governance adjusts the Dai Savings Rate according to market conditions, making returns variable.

Maintaining the 1:1 DAI/USD parity can influence the DSR: an upward or downward depeg leads to adjustments to regulate the supply of DAI.

Macroeconomic conditions and traditional finance rates also influence the DSR, depending on whether MakerDAO prioritises competitiveness or resource conservation.

2. Depeg risk

The sDAI is based on the 1:1 parity between the DAI and the dollar. Despite MakerDAO's strength, a shock to collateral assets could be problematic. The DAI has already experienced temporary parity losses.

3. Risk of smart contracts

Like all DeFi products, sDAI is based on smart contracts. A flaw in the code could compromise the funds. However, MakerDAO maintains an excellent reputation for security.

4. Liquidity risk

The emergence of more attractive products (such as sUSDS) could cause a flight of liquidity. More competitors naturally dilute liquidity, which can affect large positions.

How to get started with sDAI?

To start generating your first returns with sDAI, follow this simple guide:

1. Buy DAI

Use a centralised exchange platform (such as Binance or Coinbase) or a decentralised one (such as Uniswap or Balancer). You can also mine DAI directly on MakerDAO by depositing tokens as collateral.

2. Convert to sDAI

Connect to a compatible application such as SummerFi or Spark to convert your DAI to sDAI and start generating interest.

3. Manage your sDAI

• Option 1: Store your sDAI in a crypto wallet (such as MetaMask or Ledger) for a passive return.
• Option 2: Explore DeFi by using your sDAIs as collateral or in liquidity pools (on Balancer or Uniswap for example).

Conclusion

The sDAI represents an ideal solution for obtaining a passive and stable return in decentralised finance. Its ease of use and versatility make it suitable for both beginners and experienced users. Despite the risks inherent in DeFi, MakerDAO remains a benchmark for reliability and security.

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